Thursday, February 11, 2010

Dynamic ticket pricing and sabermetrician salaries

Over at Sabernomics, J.C. Bradbury defends "dynamic pricing," which basically means teams charging different prices for different games. It might cost a bit more to see the Yankees, or to see a weekend game, or (especially) to see the Yankees on the weekend. Conversely, a night game against the Royals on a cool night in April might be cheaper.

He's absolutely right that this is a good idea. A Yankees game and a Royals game are different products, so why should the price be the same? It's like if the Beatles play Shea Stadium, and charge $100 a ticket ... the next night, Bobby Vinton plays, and tickets are only $25. You get the same seat, in the same venue, listening to the same sound system, and let's even say it's the same stage. But, obviously, there's a reason the Beatles cost more.

I don't see that there's any issue at all. I think that Tango gets it right, when he says some of the complaints are due to the way the explanation is framed. The media are describing the situation as if Yankee games cost extra. The extra cost bothers people -- they think they're being ripped off. But, instead, if teams presented Yankee games as regular price, and Royals games as *discounted*, I think Tango is right that there would be a lot less resistance.

And, in any case, high prices for some games can be a good thing for fans overall. There are only a certain number of seats in the ballpark. What works out best is if those seats go to the fans who value them the highest. If ticket prices were absurdly low, say, five cents, you can imagine how difficult it would be to get a seat. There would be millions of people vying for those 40,000 seats, and entering a lottery for $4 season tickets. A lot of those tickets would go unused -- I can tell you for sure that if I won the lottery, I might only go to four or five games, and the other tickets would be wasted. Sure, I could give them away, but they might go to people who are as unenthusiastic about seeing the games as I am.

Have you ever gone to a store to get a particular item that you needed badly, but when you get there, you find out it's on sale this week, and as a result, the store is sold out? It's happened to me, and it drives me nuts. I really need a pound of ground beef, because I'm having friends over and making burgers. But the ground beef is on sale for $3, and so there isn't any left! But I was ready and willing to pay the $6 regular price, and so I'm frustrated.

Or ... imagine that you've waited all your life to see the Cubs make it to the World Series. Finally, it happens. You're ready to pay $1000 for a seat, because it's a once-in-a-lifetime experience, and maybe you're even one of the top 10 Cubs fans in the world. There is nothing you want more than to see that game. Alas, the Cubs, fearing bad press, sold that seat for $50, and some guy bought up your seat who doesn't even like baseball much, just to impress his friends that he was there.

That sucks. But thank God for the Coase Theorem, which says that when someone gets a seat for $50, but doesn't want to see the game that badly, he'll sell the ticket to you for something closer to $1000. But why should anyone complain about paying a higher price to the Cubs, instead of to the scalper? What good does the middleman do? And, at least if the Cubs are the ones make more money off the $1,000 ticket sales, they have an incentive to build a better team in the future.

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Anyway, an interesting thing about all this is that a couple of days before Bradbury's post, the Cleveland Indians advertised a couple of jobs, one of which is for a "baseball analyst." That appears to be a combination programmer/statistician/sabermetrician job.

Over at Tango's blog, there's a lot of interest in the position, as you might expect. Eventually, the discussion turned to pay, and the consensus seems to be that there is a "baseball discount" when working for the front office of a baseball club. That is, posters expect the Indians pay significantly less than what a similar job would pay elsewhere. A couple of commenters suggested that it might pay as little as half the market salary for similar positions outside of baseball. (The Indians' posting doesn't mention salary, so this is all speculation.)

Which, at first, sounds like a ripoff. Why should the Indians be able to underpay productive staff, just because of the glamour of working in baseball? But, just as Tango points out for the dynamic pricing of tickets, it makes more sense if you look at it the other way. It's not that the Indians are paying less because the job is so good -- it's that other places are paying *more* because they don't offer what the Indians do!

If the Indians do pay less, then whoever winds up with the job will actually have no complaint: if the Indians had offered more, that person probably would have had a lower chance of getting the job, because there would have been more qualified candidates applying. And, just as in the ticket situation, wealth (or happiness, or utility) is created this way.

Suppose Joe and Bob are exactly equally qualified and doing exactly the same work. If Joe has the Indians job at $40,000 a year, and Bob has a job at a fertilizer factory at $70,000 a year, and neither would swap with the other, then neither has any cause for complaint. Bob could say, "well, if the Indians had paid a fairer wage -- say, $50,000 -- I'd go work for them." But all that shows you is that Joe values the Indians' environment at $30,000 a year, while Bob values it at only $20,000. Just as it's better to put the Cubs tickes in the hands of whoever wants it the most, then, productivity being equal, it's better to put the Indians' job in the hands of the applicant who appreciates it the most.

12 Comments:

Your discussion of dynamic pricing is fine, but one cavil: You presume that fans vary only in terms of how much they want to see a game. But fans also vary in how much they can afford to pay. So: a casual fan for whom $100 is loose change will get the seat that the die-hard fan for whom $100 is a week's groceries will not. That should be factored into the analysis, no?

You see a lot of the depressed salaries in the sports industry. I don't know how it applies to analysts, and it has a lot to do with the sheer number of people that want to work in sports and the pay cut they're willing to take, as you mention.

This is something that, in my opinion, should be thoroughly explained to undergraduate and graduate students thinking about entering a program in sport management. Sometimes, it is not and when they're set out on the world, end up fairly disappointed in their ticket sales job.

All over the place, you see people taking jobs with no benefits and poverty wages to work 12 hours a day for the Clippers or U of M in hope that one day they'll get closer to the action. The same goes for college sports, and it's essentially what put me off from wanting to work in a college athletic department after undergrad. If you value sports that much, then it's all find and dandy.

Even with the low wages, there's still significant demand to work in those places because the value places on "working in sports" is so high.

Just a quick nitpick:

"that person probably wouldn't have had a lower chance of getting the job, because there would have been more qualified candidates applying."

I think you meant "WOULD have had a lower chance, because there would have been more qualified candidates applying". More qualified candidates would leave you with more competition, no?

Claude: yes, the poor person might be a die-hard fan and not want to see the game for $100. But, at the same time, if you lowered the price to $25, and the poor person got the ticket at that price, he'd sell the ticket to the rich person for $100 anyway, since we've already established he prefers $100 to the ticket.

Basically, the poor person is still not going to see the game. By lowering the price, you make it possible for him to make some money scalping the ticket, but, as I think JC says, there are better ways of helping the poor than giving them scalping privileges.

If you really want the poor person to see the game, you have to sell him a ticket at below market value, and then PROHIBIT HIM from selling the ticket, which he prefers to do.

Phil -- Your answer -- that the poor person would only scalp the ticket if he could buy it, and we know that is so because he wouldn't spend $100 to buy the ticket -- is impeccable micro-economic logic. However, as the behavioral economists would point out, in practice, the world doesn't work that way. (In fact, this might be a nifty case for the endowment effect.) And much of the world operates in opposition to that logic -- e.g., few poor people scalp the medicines that they get at subsidized prices.

3. Give the poor person $100 and ask him if he wants to buy the ticket. He'll say no.

4. Give the poor person a ticket and ask him if he wants to sell it for $100 cash. MAYBE he'll say no, if the endowment effect is strong for him.

On these four points, it's hard to argue that he really wants the ticket more than the $100, just because he MAY choose the ticket in ONE of the four ways of presenting the choice.

But your point is taken.

And, I suppose, if there were a charity program run by (say) the Atlanta Braves, offering discounted tickets to people who otherwise couldn't afford them -- with the stipulation that the tickets couldn't be resold -- I'd agree with you that the recipients generally wouldn't resell them. And such a program could be profitable for both sides if the game wouldn't otherwise be sold out. That's just price discrimination.

But if the game WERE sold out, the Braves would do better to sell the ticket at full price, and give the poorer fans the excess money.

My last comment -- on your last comment. Yes, the Atlanta scenario would be Pareto and social-welfare optimal. But, in the real world, it never happens.... except indirectly, when government taxes the Braves (or the owners and players) for a chunk of the game receipts and then redistributes it. Thanks for the blog.... Much enjoyed.

Remember, though, finding a buyer to sell a ticket for $100 requires a cost. I would rather have the cash than the ticket. But I would rather be stuck with the ticket than have to put an ad on craigslist

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As a low-income sports fan, we should all appreciate being priced out of tickets. It means the teams we like can put together a better product that we can still enjoy for free

I think you're assuming that because a person won't spend $100 for a ticket, he doesn't value the ticket at $100. There are many things I have not bought because they were too expensive without my thinking that they were overpriced. I simply couldn't afford it.

1. Ask the poor person if he'd rather have $100 cash or the ticket. He'd take the cash.

I don't know about that. If I'm a poor Cubs fan, and you give me $100, I'm momentarily happy, but still poor. Give me a ticket to a Cubs playoff game and I've got a lifetime memory. I would probably take it.

King,All that suggests is low income fans value going to Wrigley more than they value the cash. So there should be no issues when the team raises prices since the fans are still getting a better product (lifetime memory) than whatever else the money could give them (momentarily happy)

The fact is that teams aren't charities. They do give away some tickets to legitimately poor people. These are (generally speaking) tickets they weren't going to sell anyway. It seems to me perfectly logical that teams sell at market price.

I'm curious if you read the study relating to Duke final four tickets. Duke held a lottery to give away tickets. Students that won the lottery had the ability to sell the tickets. Students that lost could buy the tickets. There was a huge divergence in the estimated value of the tickets. Those with them thought they were worth $2000. Those without them thought they were worth $100. This wasn't all negotiating posture either.

In theory, there should have been an equilibrium price. You can have $800 or you can have a ticket. It really doesn't matter whether you already have a ticket or not. The choice is still the same as if somebody offered you either. In reality, the people that had the tickets thought only about the pain of losing the tickets. The people that had the money thought only about the pain of paying the money. This same logic explains why cable companies offer you free HBO for two months and tell you that you can cancel it later.

"This is something that, in my opinion, should be thoroughly explained to undergraduate and graduate students thinking about entering a program in sport management."

I could not agree more!!!

Its not just sports management. People need to know that in general there is a huge penalty to pay for working in a field others find interesting. Theres a huge reward for working in a field that others find dull. That doesn't mean you shouldn't do it anyway, but high school guidance counselors should make the tradeoffs abundantly clear.

If you can find a field that you find interesting but nobody else does, you are set for life....